Spanish-German loan rate gap widens, strain on Spain rises

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Eurozone bond markets were under strain Friday on growing concerns that Spain and Portugal may have to seek help, pushing the Spanish borrowing rate to a record high above German levels on Friday.

The 10-year borrowing rate for Portugal also rose to a record high of 7.121 percent.

Investors sold off Spanish bonds so that the yield or interest earned on its 10-year benchmark was a record 2.60 percentage points higher than the rate paid by Germany.

The German 10-year borrowing rate is the lowest and the benchmark in the 16-nation eurozone and any sharp widening of the gap, or spread, reflects concern about the ability of a weaker country to finance its debt.

At more than about 7.0 percent, the cost of borrowing begins to become prohibitive, as happened for Greece six months ago when the European Union and International Monetary Fund had to step in and save Athens from default.

The spread between the Spanish and German rate was 1.95 percentage points on November 15 and the increase since then is a measure of rising scepticism that Spain can avoid asking for financial support from the EU and IMF.

One investment strategist in Paris, who declined to be named, commented: "This is a rocket taking off."

Referring to stiff austerity measures adopted by Madrid, he said they "are having no effect because the deficits remain extraordinary."

He argued that the situation would last "for as long as the market is not confident about the ability of a country to apply a real austerity policy."

He said: "The remedy is austerity, or payment default."

Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday "absolutely" ruled out any possibility of Spain having to be rescued, as was agreed in principle for Ireland last week six months after the rescue for Greece.

Greece, Ireland, Portugal and Spain are all members of the eurozone and are regarded on financial markets as the members of the single currency area most in trouble over their public finances.

© 2010 AFP

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